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Caldera v. Northrop Worldwide Aircraft Services

September 10, 1999


Mayer, Chief Judge, Schall, and Gajarsa, Circuit Judges.

The opinion of the court was delivered by: Gajarsa, Circuit Judge.

Appealed from: Armed Services Board of Contract Appeals


The Secretary of the Army ("Army") appeals from the final decision of the Armed Services Board of Contract Appeals ("Board"). See In re Northrop Worldwide Aircraft Servs., Inc., ASBCA No. 45216, ASBCA No. 45877, 98-1 BCA ¶ 29,654 (Mar. 26, 1998). The Board reversed the contracting officer's final decision denying a claim by Northrop Worldwide Aircraft Services, Inc. ("NWASI") for reimbursement of legal costs. The Board found that legal costs incurred by NWASI in defending a wrongful discharge lawsuit brought by former employees in Oklahoma state court were reasonable and allocable to a cost-reimbursement contract NWASI had with the Army. The employees were allegedly discharged for unsatisfactory performance on the cost-reimbursement contract. Because the Board erred in not granting collateral estoppel effect to the Oklahoma state court proceedings, we reverse the Board's decision holding NWASI's claimed amounts for legal costs as allowable costs under the cost-reimbursement contract.


On June 9, 1987, the Army awarded a cost-reimbursement award fee contract to NWASI for the maintenance, supply, and transportation functions of the Directorate of Logistics Operations at Fort Sill, Oklahoma. The contract was modified by bilateral agreement in October 1988. The contract provided for payments on a cost basis plus discretionary bonuses dependent upon performance, the bonus was at least partially contingent upon NWASI's maintenance of 90% of the vehicles subject to the contract in operational order. The contract required NWASI to keep for inspection and verification log books of the vehicles being repaired.

The Army monitored NWASI's performance of the contract with unscheduled visits by Army Quality Assurance Evaluators ("QAEs"), the issuance of contract discrepancy reports ("CDRs") and weekly progress meetings. In November 1988, a QAE issued a CDR report for NWASI's failure to meet the 90% operational rate. The Army had discretion to withhold part or all of the bonus for this deficient performance.

From October 1988 to February 1990, NWASI employed Charles Cook, Charlie Lewis, and Melvin Miller as Quality Control Inspectors in the Maintenance Division on NWASI's contract with the Army. They were employed "at will" and were responsible for inspection of vehicle maintenance at Fort Sill on the contract. On February 14, 1990, NWASI terminated Mr. Lewis for allegedly violating its rules by being away from his duty station and for harassment of fellow employees. On February 15, 1990, Mr. Miller was terminated for allegedly refusing to perform a requested inspection. On February 23, 1990, Mr. Cook was terminated for allegedly violating NWASI's rules against fighting and for harassment.

On February 15, 1990 (the same day he was terminated) Mr. Miller complained to the Army Criminal Investigation Division ("CID") that NWASI might be committing fraud in its inspections. Specifically, he alleged that NWASI employees were hiding log books to make it appear that the 90% readiness rate was being met. Eventually the CID completed its investigation and concluded that there was insufficient evidence to prosecute NWASI for the alleged offenses.

On May 9, 1990, Miller, Cook, and Lewis filed a civil suit against NWASI in Oklahoma state court, claiming wrongful termination in that they were discharged for refusing to follow NWASI directions and participate in fraud against the Army in connection with the contract. *fn1 The case was tried before a jury and at the close of evidence the Judge instructed the jury that "Plaintiffs claim: a significant factor in Defendant's decision to terminate Plaintiffs was that Plaintiffs refused to violate Oklahoma's public policy by committing acts of fraud against the government in violation of a government contract." The court went on to instruct the jury on the essential elements of the claim that the plaintiffs had to establish by a preponderance of the evidence: (1) that they were employees of NWASI; (2) that during the terms of their employment they were asked to commit acts in violation of Oklahoma's public policy which they refused to do; (3) that they were discharged by NWASI and the discharge was significantly motivated by NWASI's desire to retaliate against them for their refusal; and (4) that they sustained actual damages by reason of the termination. On September 20, 1991, after a five-day trial, the jury found for the plaintiffs and awarded plaintiffs $900,000 in compensatory damages and $900,000 in punitive damages. The jury verdict was upheld on appeal. The Oklahoma Supreme Court denied certiorari.

Before the Oklahoma jury verdict was rendered, the contracting officer ("CO") granted NWASI's request for reimbursement of legal fees incurred in defending the lawsuit and paid NWASI $62,500. On May 20, 1992, NWASI submitted a certified claim for legal fees in the additional amount of $139,000. The CO denied this claim and later demanded and received a refund of the fees already paid. On December 2, 1992, NWASI submitted a certified claim for that amount which had been denied. The CO again denied the claim with a final decision on January 4, 1993. NWASI appealed this decision to the Board. On March 31, 1995, NWASI made an amended demand for $291,208 in legal fees, including the appeal expenses.

The Board denied the parties' cross motions for summary judgment on February 15, 1995. See In re Northrop Worldwide Aircraft Servs., Inc., ASBCA No. 45216, ASBCA No. 45877, 95-1 BCA ¶ 27,503 (Feb. 15, 1995). The Board concluded that costs in defending the lawsuit may be allocable to the contract if they were necessary to the overall operation of NWASI's business, and if they were the types of costs which would be incurred by a reasonably prudent person in the conduct of a competitive business. *fn2 The Board concluded that it would be necessary for the parties to offer evidence as to the reasonableness, at the time of the litigation, of incurring fees to defend the litigation. On September 19, 1996, the Board denied NWASI's renewed motion for summary judgment finding that the reasonableness of the legal fees was a dispute that required a trial. See In re Northrop Worldwide Aircraft Servs., Inc., ASBCA No. 45216, ASBCA No. 45877, 96-2 BCA ¶ 28,574 (Sept. 19, 1996). The Board determined that

"the issue of whether appellant's [NWASI's] legal costs are allocable under FAR 31.201-4 depends on whether the claimed costs were "necessary to the overall operation of the business." We have stated that this criterion for allocability is extremely broad and does not require that a connection be shown between the cost incurred and a Government contract." Id. at n.5.

The Board went on to state that the issue of whether the legal costs were allowable costs *fn3 involved a consideration of reasonableness *fn4 and that there was a genuine issue of material fact as to whether NWASI took the actions ...

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